In the Matter of FIDELITY MANAGEMENT RESEARCH …
I n t h e M a t t e r of FI D ELI TY M AN AGEM EN T RESEARCH COM PAN Y a nd FM R CO., I N C., Respondent
AD M I N I STRATI VE PROCEED I N G File N o. 3 - 1 2 9 7 6
SECURI TI ES AN D EX CH AN GE COM M I SSI ON
I N VESTM EN T AD VI SORS ACT OF 1 9 4 0 Re le a se N o. 2 7 1 3 ; I N VESTM EN T COM PAN Y ACT OF 1 9 4 0 Re le a se N o. 2 8 1 8 5
March 5 , 2 0 0 8
ACTI ON : ORD ER I N STI TUTI N G AD M I N I STRATI VE AN D CEASE- AN D - D ESI ST PROCEED I N GS, M AKI N G FI N D I N GS, AN D I M POSI N G REM ED I AL SAN CTI ON S AN D A CEASE- AN D - D ESI ST ORD ER PURSUAN T TO SECTI ON S 2 0 3 ( e ) AN D 2 0 3 ( k ) OF TH E I N VESTM EN T AD VI SERS ACT OF 1 9 4 0 AN D SECTI ON S 9 ( b) AN D 9 ( f) OF TH E I N VESTM EN T COM PAN Y ACT OF 1 9 4 0
T EX T :
I.
The Securit ies and Exchange Com m ission ( " Com m ission" ) deem s it appropr iat e and in t he public int erest that public adm inistrative and cease- and- desist proceedings be, and hereby are, inst ituted pursuant to Sections 203( e) and 203( k) of the I nvestm ent Advisers Act of 1940 ( "Advisers Act") and Sect ions 9( b) and 9( f) of t he I nvest m ent Com pany Act of 1940 ( " I nvest m ent Com pany Act " ) , against Fidelit y Managem ent & Research Com pany ( " FMR" ) and FMR Co., I nc. ( " FMR Co." ) ( collect ively " Respondent s" or " Fidelit y" ) .
II.
I n ant icipat ion of t he inst it ut ion of t hese proceedings, Respondent s have subm it t ed an Offer of Set t lem ent ( t he " Offer" ) t hat t he Com m ission has det erm ined t o accept . Solely for t he purpose of t hese proceedings and any ot her proceedings brought by or on behalf of t he Com m ission, or t o w hich t he Com m ission is a part y, and w it hout adm it t ing or denying t he findings herein, except as t o t he Com m ission's j ur isdict ion over t hem and t he subj ect m at t er of t hese proceedings, w hich are adm it t ed, Respondent s consent t o t he ent ry of t his Order I nst it ut ing Adm inist rat ive and Cease- and- Desist Proceedings, Making Findings, and I m posing Rem edial Sanct ions and a Cease- and- Desist Order Pursuant to Sect ions 203( e) and 203( k) of the I nvestm ent Advisers Act of 1940 and Sections 9( b) and 9( f) of the I nvest m ent Com pany Act of 1940 as set fort h below .
III.
On t he basis of t his Order and Respondent s' Offer, t he Com m ission finds n1 t hat :
A. RESPON DEN TS
1. FMR is a priv at ely held Massachuset t s corporat ion regist ered w it h t he Com m ission as an invest m ent adviser pursuant to Section 203( c) of the Advisers Act, with its principal place of business in Boston, Massachuset t s. FMR is a w holly ow ned subsidiary of FMR LLC, a priv at ely held Delaw are lim it ed liabilit y com pany. FMR is an adv iser t o various inst it ut ional client s and has approxim at ely $ 1.25 t r illion in asset s under m anagem ent . FMR's inst it ut ional client s include a group of approx im at ely 350 regist ered invest m ent com panies m arket ed under t he " Fidelit y I nvest m ent s" t rade nam e and m anaged by FMR and it s affiliat es ( hereaft er " t he Fidelit y Funds" ) .
2. FMR Co. is a privat ely held Massachuset t s corporat ion regist ered w it h t he Com m ission as an investm ent adviser pursuant to Sect ion 203( c) of t he Advisers Act, with its principal place of business in
Bost on, Massachuset t s. FMR Co. is a w holly ow ned subsidiary of FMR and provides port folio m anagem ent serv ices as a sub- adviser t o cert ain client s of FMR, including t he Fidelit y Funds.
B. OTHER RELEVAN T PARTI ES n2
3. Scot t E. DeSano, age 47, lives in Bost on, Massachuset t s. He w as associat ed w it h FMR Co. from 1991 t o July 2005, and w as it s senior vice president in charge of global equit y t rading from 1996 unt il he w as reassigned t o an affiliat e of FMR in July 2005. From at least January 2002 t hrough Oct ober 2004, he supervised Fidelit y's Bost on dom est ic equit y t r ading desk ( " Equit y Trading Desk" ) and ot her equit y trading operat ions. I n all, DeSano supervised m ore than thirty equity traders. n3 He reported to a senior vice president of FMR Co. ( Bart Grenier) . He also appeared as a represent at ive of Fidelit y in public t est im ony before Congress, t he Com m ission, and ot her regulat ory bodies.
4. Bart A. Grenier, age 49, lives in Bost on, Massachuset t s. Aside from a four- m ont h period in 1997, Grenier w as associat ed w it h FMR Co. from 1991 unt il June 2005. During t he Relev ant Period, n4 he w as a senior vice president of FMR Co. w it h superv isor y responsibilit y for Fidelit y's equit y t rading operat ions and several of its other business groups.
5. Pet er S. Lynch, age 64, lives in Marblehead, Massachuset t s. He has been associat ed w it h FMR and FMR Co. in var ious capacit ies since 1969, and w as t he port folio m anager of Fidelit y's Magellan Fund from 1977 t o 1990. Since ret ir ing from Magellan, he has been t he v ice chairm an and a direct or of FMR and FMR Co. He w as an int erest ed t rust ee of t he Fidelit y Funds from 1990 unt il February 2003, and has since served as a m em ber of t he Advisory Board of t he Fidelit y Funds.
6. Marc C. Beran, age 38, lives in Sout hborough, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1997 unt il January 2005. During t he Relevant Period, he w as a sect or t rader specializing in energy and m at erials stocks.
7. Thom as H. Bruderm an, age 39, lives in Bost on, Massachuset t s. He was a dom est ic equit y t rader at FMR Co. from 1998 unt il Decem ber 2004. During t he Relev ant Period, he w as a sect or t rader specializing in healt hcare and pharm aceut icals stocks.
8. Tim ot hy J. Burnieika, age 38, lives in Cohasset , Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 2000 unt il Sept em ber 2005, w hen he w as reassigned t o ot her dut ies t hat do not involve t rading. During t he Relev ant Period, he w as a pr im ary t rader report ing t o St even Pascucci.
9. Robert L. Burns, age 46, lives in Brook line, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1986 unt il Decem ber 2004. Dur ing t he Relevant Period, he w as a sect or t rader specializing in technology stocks and reporting to David Donovan.
10. David K. Donovan, age 45, lives in Marblehead, Massachuset ts. He was a dom est ic equity trader at FMR Co. from 1992 unt il March 2005. During t he Relev ant Period, he w as a sect or t rader specializing in t echnology st ock s, and he w as also a t eam leader of several sect or t raders, including Robert Burns, Jeffrey Harris and Kirk Sm it h.
11. Edw ard S. Driscoll, age 42, lives in Scit uat e, Massachuset t s. Aside from a t en- m ont h st int at anot her firm , he w as a dom est ic equit y t rader at FMR Co. from 1997 unt il March 2005. During t he Relevant Period, he w as a sect or t r ader specializing in food and bever age, household it em s, m at erials, and capit al goods stocks.
12. Jeffrey D. Harris, age 35, lives in Char lest ow n, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1998 unt il July 2005. During t he Relevant Period, he w as a sect or t rader specializing in technology stocks and reporting to David Donovan.
13. Christ opher J. Horan, age 37, lives in Bost on, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1999 unt il Sept em ber 2005, w hen he w as reassigned t o ot her dut ies t hat do not involve
t rading. During t he Relev ant Period, he w as a sect or t rader specializing in insurance, capit al goods, and restaurant stocks.
14. St even P. Pascucci, age 41, lives in Concord, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1997 unt il Sept em ber 2005, w hen he w as reassigned t o ot her dut ies t hat do not involve t rading. During t he Relev ant Period, he w as a pr im ary t rader, and from 1998 unt il early 2005, he w as a t eam leader of t he ot her prim ary t raders, including Tim ot hy Burnieika.
15. Kirk C. Sm it h, age 43, lives in Walpole, Massachuset t s. He w as a dom est ic equit y t rader at FMR Co. from 1997 unt il Septem ber 2005, when he was reassigned to other dut ies t hat do not involve trading. During t he Relev ant Period, he w as a sect or t rader specializing in t echnology st ocks and report ing t o David Donovan.
C. FACTS
Sum m ary
16. During t he period from at least January 2002 t hrough Oct ober 2004, t w o Fidelit y senior execut ives ( DeSano and Grenier) and t en Fidelit y equit y t raders ( Beran, Bruderm an, Burnieika, Burns, Donov an, Driscoll, Harr is, Horan, Pascucci and Sm it h) in aggregat e accept ed approxim at ely $ 1.6 m illion w ort h of travel, ent ertainm ent and gifts from brokerage firm s that sought and obt ained orders to buy or sell securit ies on behalf of Fidelit y's advisory client s. n5 I n addit ion, Lynch request ed and received t icket s t o event s from t wo equit y t r aders, who obt ained t hose t icket s from brokers. Those brokerage firm s each received m illions of dollars in com m ission revenue for handling orders from Fidelit y's adv isory client s' accounts. DeSano and the traders in aggregate accepted from brokers dozens of expensive trips, frequently by private j et, including excursions to t he Super Bowl, fam ily vacat ions to Berm uda, Nant ucket and t he Car ibbean, golf out ings at exclusive clubs in Flor ida and Sout h Carolina, w eekends in Las Vegas, lodging at fine hot els, and even an ext ravagant , t hree- day bachelor part y for Bruderm an in Miam i. Brokers also prov ided t he Fidelit y execut ives and t raders w it h gift s including prem ium t icket s t o t he World Series, t he U.S. Open, Wim bledon, Rolling St ones concert s, and dozens of ot her sport ing events and concerts. I n addition, certain traders accepted illegal drugs from brokers and one trader's illegal gam bling was facilitated by a broker. n6
17. The t en t raders allow ed t he receipt of t ravel, ent ert ainm ent and gift s t o influence t heir select ion of brokers t o handle t ransact ions for Fidelit y's client s. As one t rader com m ent ed t o anot her, " Word is out that order flow is for sale." I n addit ion, cert ain traders routinely sent transact ions to brokers who were m em bers of their fam ilies or brokers with whom they had a rom antic relat ionship. n7
18. DeSano, w ho supervised Fidelit y's equit y t rading operat ions, personally accept ed t ravel, ent ert ainm ent and gift s from brokers w ho sought and obt ained securit ies t r ansact ions for Fidelit y's client s. He solicit ed t icket s from brokers for him self and t o sat isfy request s from his superv isor, Grenier. He accom panied cert ain t raders on several trips by private j et paid for by brokers, including attending part of Bruderm an's bachelor party in Miam i, and t raders told him about som e of the other private j et trips and t icket s they received from brokers. He also knew that cert ain traders direct ed transactions to brokers who were m em bers of their fam ily or wit h whom they had a rom antic relat ionship. Nevertheless, DeSano failed to m onitor the traders' receipt of travel, ent ertainm ent and gifts in any system atic way and failed to t ake reasonable steps to ensure that they were seeking best execution or com plying with Fidelit y's policy concerning it s em ployees' receipt of gift s and grat uit ies.
19. Under Sect ion 17( e) ( 1) of t he I nvest m ent Com pany Act , affiliat ed per sons of a regist ered invest m ent com pany, such as Fidelit y execut ives and t raders, are prohibit ed from accept ing " from any source any com pensation ( other than a regular salary or wages from such registered com pany) for t he purchase or sale of any propert y" of t he invest m ent com pany. The obj ect ive of Sect ion 17( e) ( 1) is t o prevent persons affiliat ed with registered investm ent com panies from having conflict s of interest im pair t heir j udgm ent and loyalt y. A violat ion of Sect ion 17( e) ( 1) of t he I nvest m ent Com pany Act is com plet e upon receipt of t he com pensat ion. During t he Relevant Period, t w o Fidelit y execut ives ( DeSano and Grenier) and t en Fidelit y t raders ( Ber an, Bruderm an, Burnieik a, Burns, Donovan, Driscoll, Harr is, Horan,
Pascucci and Sm it h) received com pensat ion in v iolat ion of Sect ion 17( e) ( 1) of t he I nvest m ent Com pany Act in the form of travel, entertainm ent and gifts paid for by brokers who sought and obt ained from t hose t raders secur it ies t ransact ions for Fidelit y's client s. I n addit ion, anot her Fidelit y execut ive ( Ly nch) caused t w o Fidelit y t raders' violat ions of Sect ion 17( e) ( 1) . Fidelit y failed t o adopt and im plem ent a system of controls sufficient to detect, deter, and prevent the receipt by these execut ives and traders of t ravel, ent ert ainm ent and gift s paid for by broker s as described herein. As a result , Fidelit y failed reasonably to supervise t he execut ives and traders, within the m eaning of Section 203( e) ( 6) of the Advisers Act , w it h a view t o prevent ing t heir violat ions of Sect ion 17( e) ( 1) of t he I nvest m ent Com pany Act .
20. Under Sect ion 206 of t he Advisers Act , an invest m ent adviser has a fiduciary dut y t o seek best execution for its clients' securit ies transact ions - - t hat is, to seek the m ost favorable term s reasonably available under the circum stances. I n determ ining whether an adviser is seeking best execution, the key criterion is whether the adviser selects the transaction which "represents the best qualit at ive execut ion for t he m anaged account ." n8 During t he Relevant Period, Fidelit y allow ed cert ain em ployees' receipt of travel, ent ertainm ent and gifts and certain em ployees' fam ily or rom ant ic relat ionships to ent er int o the select ion of brokers. Accordingly, Fidelit y w illfully violat ed Sect ion 206( 2) of t he Advisers Act , result ing in t he subst ant ial possibilit y of higher execut ion cost s for Fidelit y 's adv isory client s. n9
21. Under Sect ion 206 of t he Advisers Act , an invest m ent adviser has a fiduciary dut y t o disclose all m at erial conflict s of int erest t o it s adv isory client s. During t he Relev ant Period, Fidelit y failed t o disclose t o it s adv isory client s t he conflict s of int erest arising from t he receipt by cert ain Fidelit y execut ives and traders of travel, entert ainm ent and gift s from , and certain traders' fam ily and rom antic relationships w it h, brokers w ho sought and obt ained securit ies t ransact ions for Fidelit y's client s, and failed t o disclose that such travel, entertainm ent, gift s and relationships becam e addit ional factors in the traders' select ion of brokers. Accordingly, Fidelit y w illfully violat ed Sect ion 206( 2) of t he Advisers Act .
22. Under Sect ions 204, 206 and 207 of t he Adv isers Act and Rule 204- 1 t hereunder and Sect ion 34( b) of t he I nvest m ent Com pany Act , an invest m ent adviser m ay not m ake m at erially false and m isleading st at em ent s in public disclosure docum ent s, such as an invest m ent adv iser's Form ADV and a regist er ed invest m ent com pany's pr ospect us and st at em ent of addit ional inform at ion ( " SAI " ) . During t he Relev ant Period, Fidelit y's Form s ADV and t he SAI s w hich it prepared for t he Fidelit y Funds st at ed t hat Fidelit y selected brokers for its clients' transact ions based on an it em ized list of fact ors but failed to include t he addit ional significant fact ors considered by cert ain traders - - their receipt of travel, entert ainm ent and gift s from brokers and t heir fam ily or rom ant ic relat ionships w it h brokers. As a result , Fidelit y w illfully violat ed Sect ions 204, 206( 2) and 207 of t he Advisers Act and Rule 204- 1 t hereunder and Sect ion 34( b) of t he I nvest m ent Com pany Act .
23. On behalf of Fidelit y, DeSano m ade present at ions t o com m it t ees of t he t rust ees of t he Fidelit y Funds in w hich he t oo ident ified t he fact ors t hat Fidelit y used in select ing brokers. DeSano also t old t he t rust ees t hat Fidelit y required brokers t o com pet e for it s brokerage business based on t he qualit y of t heir t rade execut ion. Those st at em ent s were false and m isleading because DeSano failed t o disclose ( 1) t hat cert ain Fidelit y t raders select ed brokers for Fidelit y's business based on addit ional significant fact ors of which he was aware - - travel, entert ainm ent and gifts from brokers and fam ily or rom ant ic relat ionships w it h brokers, and ( 2) t hat brokers com pet ed for Fidelit y's business based on t hose addit ional fact ors as w ell. As a result , Fidelit y w illfully violat ed Sect ion 206( 2) of t he Advisers Act .
24. Under Sect ion 204 of t he Advisers Act and Rule 204- 2 t hereunder, an invest m ent adviser is required to m ake and keep true, accurate and current books and records relating to its investm ent advisory business, including originals or copies of certain docum ents reflect ing its com m unicat ions with brokerage firm s relat ing t o t he placing or execut ion of orders t o purchase or sell secur it ies. During t he Relevant Period, Fidelit y t raders used an elect ronic m essaging net w ork supplied by Bloom berg L.P. ( " Bloom berg" ) t o com m unicat e w it h brokers. Fidelit y failed t o m ake and keep t rue, accurat e, and current or iginals or copies of such m essages. As a result , Fidelit y w illfully violat ed Sect ion 204 of t he Advisers Act and Rules 204-2(a)(7)(iii) and 204-2(g) thereunder.
Background on Fidelit y's Equit y Trading D esk
25. Fidelit y m anages one of t he largest m ut ual fund com plexes in t he Unit ed St at es. Fidelit y equit y t raders buy and sell m illions of shares of st ock ev ery day for t he Fidelit y Funds and ot her inst it ut ional client s. As an invest m ent adviser, Fidelit y has a fiduciary dut y t o seek best execut ion for it s client s' securit ies transact ions and to disclose to its clients all m at erial facts concerning conflicts of interest.
26. The Fidelit y Funds and cert ain of Fidelit y's ot her inst it ut ional client s' account s are m anaged by port folio m anagers who m ake invest m ent decisions on t heir behalf. The port folio m anagers send t heir orders to equity traders, who are responsible for select ing brokers to handle the transact ions. During the Relev ant Period, t he Equit y Trading Desk bought and sold m ore t han 73 billion shares of equit y securit ies ( nearly 26 billion shares per year) with a total principal of m ore t han $ 1.4 trillion ( nearly $ 500 billion per year) . Fidelit y's equit y t rading generat ed m ore t han $ 2.3 billion in com m issions ( ov er $ 800 m illion per year) paid t o brokerage firm s by Fidelit y's client s, including t he Fidelit y Funds.
27. During t he Relevant Period, FMR Co.'s equit y t rading oper at ions em ployed near ly sixt y people, including 33 t raders ( seven "prim ary" t raders and 26 "sect or" t raders) . Under DeSano's supervision, t he t raders had broad discret ion t o select brokerage firm s t o handle securit ies t ransact ions. The prim ary lim it at ion was t hat the traders could only select from a list of approxim ately 100 firm s that had been form ally approved by Fidelit y.
Fidelit y Ex ecut ives and Traders Received Tra vel, Ent ert ainm ent and Gift s from Brok ers Se e k ing a nd Obt a ining Se cur it ie s Tr a nsa ct ion s for Fide lit y 's Clie nt s
Overview
28. During t he Relevant Period, t w o Fidelit y senior execut ives ( DeSano and Grenier) and t en Fidelit y equit y t raders ( Ber an, Br uderm an, Burnieika, Bur ns, Donovan, Driscoll, Harris, Horan, Pascucci and Sm ith) in aggregate accepted approxim ately $ 1.6 m illion worth of travel, entertainm ent and gifts from brokerage firm s t hat sought and obt ained orders t o buy or sell secur it ies on behalf of Fidelit y 's advisory client s. n10 I n addit ion, Lynch request ed and received t icket s t o event s from t wo equit y t raders, who obtained t hose t icket s from brokers. Brokers took DeSano and/ or certain traders, som et im es in groups, on m ore t han t hirt y t rips t o such dest inat ions as t he Super Bow l, Las Vegas, Flor ida, t he Car ibbean, and Nant ucket . These excursions som et im es included t ravel by pr ivat e j et , lodging at fancy resort s, ent ry t o exclusive golf courses, tickets to m aj or sport ing events, lim ousine service, expensive dinners, other am enities such as spa services, and, for certain traders, adult entert ainm ent and illegal drugs. Bruderm an even organized, and brokers paid for, his own extravagant, three- day bachelor party in Miam i, part of which DeSano att ended and which cost brokers approxim ately $ 160,000.
29. One brokerage firm seeking and obt aining Fidelit y's business, Jefferies & Co., I nc. ( " Jefferies" ) , gave one of it s brokers, Kevin W. Quinn, a t r avel and ent ert ainm ent budget of $ 1.5 m illion per year. From t hat budget , Quinn ent er t ained DeSano and sever al Fidelit y t r aders, pr im ar ily by t aking t hem on w eekend excursions by privat e j et . n11 For exam ple, Quinn organized an annual t rip he called t he " Fall Classic," w hich included privat e j et t ravel, exclusive golf out ings, lodging at expensive resort s, and ot her act ivit ies. During t he Nov em ber 2002 Fall Classic, for exam ple, Quinn t ook DeSano, Bruderm an and Harris by priv at e j et t o Las Vegas. Quinn prov ided accom m odat ions at t he Bellagio Hot el, several thousand dollars worth of golf m erchandise, a private band, m eals, golf, and entertainm ent at a nearby st rip club. The group cont inued by priv at e j et t o Cabo San Lucas, Mexico, w here Quinn prov ided accom m odat ions in villas at t he Esperanza Hot el, m eals, m ore golf, and ot her ent ert ainm ent . Jefferies paid approxim ately $ 200,000 for the expenses incurred on this trip.
30. Brokers ot her t han Quinn also t ook Fidelit y t raders on a var iet y of t rips. For exam ple, each year during t he Relevant Per iod, various brokers t ook several Fidelit y t r aders t o t he Super Bow l. Brokers often provided the traders with travel by private j et, lodging at expensive hotels, adm ission to exclusive pre- gam e part ies, t ickets to the Super Bowl, golf greens fees, lim ousines, and other lavish ent ert ainm ent . Even w hen t hey did not provide privat e j et s, brokers oft en t ook t raders on t rips t o Las
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